Eco­nomic Sur­vey says lack of exit norms cost­ing In­dian econ­omy

The Pak Banker - - BUSINESS -


Im­ped­i­ments to easy exit of loss­mak­ing en­ti­ties are cost­ing the In­dian econ­omy in mon­e­tary and political terms, the Eco­nomic Sur­vey 2015-16 warned, mak­ing a case for al­low­ing quick clo­sures.

The Sur­vey, an an­nual ex­er­cise in de­tail­ing the health of the In­dian econ­omy just be­fore the Union bud­get, noted that In­dia has made much head­way in re­mov­ing bar­ri­ers to the en­try of firms, tal­ent and tech­nol­ogy into the In­dian econ­omy in the past two decades. But a tor­tu­ous exit process taints In­dia's eco­nomic achieve­ments­mak­ing it a tran­si­tion from "so­cial­ism with lim­ited en­try to mar­ketism with­out exit", said the Sur­vey in a chap­ter ti­tled 'The Chakravyuha Chal­lenge of the In­dian Econ­omy'.

Chakravyuha is a war for­ma­tion men­tioned in the epic Ma­hab­harata. In the cli­mac­tic bat­tle, the war­rior Ab­hi­manyu, who knows how to pen­e­trate the for­ma­tion, but not how to exit it, is trapped and killed. The "exit prob­lem" arises due to "the three Is: in­ter­ests, in­sti­tu­tions, and ideas/ide­ol­ogy," the Sur­vey said.

The ref­er­ence is firstly to vested in­ter­ests block­ing re­forms or exit plans. Se­condly, weak in­sti­tu­tions are un­able to pun­ish wil­ful de­fault­ers, and if demon­stra­ble wrong­do­ing goes un­pun­ished, their le­git­i­macy is called into ques­tion. On the other hand, in the case of en­ti­ties like pub­lic sec­tor banks, "it is well-known that se­nior man­agers are of­ten re­luc­tant to take de­ci­sions to write down loans for fear of be­ing seen as favour­ing cor­po­rate in­ter­ests and hence sus­cep­ti­ble to scru­tiny" by "strong" in­sti­tu­tions like the in­ves­tiga­tive agen­cies, the Sur­vey said.

"This en­cour­ages ever-green­ing of loans, post­pon­ing exit," it said. Lastly, there's the dif­fi­culty of phas­ing out en­ti­tle­ments in a demo­cratic coun­try with size­able poverty and in­equal­ity, the Sur­vey pointed out. Some mea­sures to rem­edy the sit­u­a­tion in­clude the Naren­dra Modi-led govern­ment's new bank­ruptcy law and the re­ha­bil­i­ta­tion of stalled projects that pro­vide a sig­nif­i­cant boost to long-run ef­fi­ciency and growth, the Sur­vey said.

The cen­tre hopes this law will im­prove the rank­ing of Asia's third largest econ­omy in the World Bank's Ease of Do­ing Busi­ness in­dex, where In­dia is ranked 130 among 189 na­tions.

World Bank data shows that it takes more than four years to re­solve an in­sol­vency in In­dia. The cen­tre hopes to cut this time to less than a year. The In­sol­vency and Bank­ruptcy Code, 2015 was in­tro­duced by fi­nance min­is­ter Arun Jait­ley in the Lok Sabha on 21 De­cem­ber 2015. It has been re­ferred to a joint com­mit­tee of Par­lia­ment.

The bill pro­vides for re­solv­ing cor­po­rate in­sol­vency ap­pli­ca­tions within 180 days, with an op­tion of ex­tend­ing it by 90 days. It also has a clause to pro­vide for in­sol­vency pro­fes­sion­als, who will spe­cial­ize in help­ing sick firms.

The Sur­vey listed the fer­tiliser sec­tor, civil avi­a­tion, pub­lic sec­tor bank­ing, power dis­tri­bu­tion firms, cen­tral pub­lic sec­tor en­ter­prises, steel and some large in­fra­struc­ture firms as ar­eas most il­lus­tra­tive of the prob­lem. "The lack of exit creates at least three types of costs: fis­cal, eco­nomic (or op­por­tu­nity) and political," it said.

In the case of fis­cal costs, "exit is im­peded of­ten through govern­ment sup­port of in­cum­bent, mostly in­ef­fi­cient, firms". Th­ese costs mostly come in the form of ex­plicit sub­si­dies like bailouts or im­plicit ones like tar­iffs or loans from state-owned banks.

Eco­nomic losses re­sult "from re­sources and fac­tors of pro­duc­tion not be­ing em­ployed in their most pro­duc­tive uses. In a cap­i­tal-scarce coun­try such as In­dia, mis­al­lo­ca­tion of re­sources can have sig­nif­i­cant costs," the Sur­vey warned.

An­other cost, in the cur­rent con­text, comes from the "over­hang of stressed as­sets on cor­po­rate and bank bal­ance sheets. It re­flects the dif­fi­culty of ap­por­tion­ing costs of past mis­takes be­tween equity hold­ers, cred­i­tors, tax­pay­ers and con­sumers.

Chi­nese Premier Li Ke­qiang speaks in a video mes­sage to the G20 Fi­nance Min­is­ters and Cen­tral Bank Gov­er­nors Meet­ing that opened.

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